FSA use-it-or-lose-it rules
Last updated August 2026
Short answer
Two different deadlines apply and they are frequently confused: the date by which the expense must happen, and the date by which the paperwork must arrive.
Why the rule exists
The full annual election is available from the first day of the plan year, before you have contributed most of it.
An employee who spends it all in January and leaves in February generally keeps the benefit, and the employer absorbs the loss.
Forfeiture of unused balances is the other side of that arrangement, which makes the rule a trade rather than an arbitrary penalty.
Carryover
Up to $680 of unused funds may move into the next plan year for 2026, if the plan includes the feature.
Carried-over money can be spent on expenses incurred at any point in the following year, so it behaves like ordinary balance.
Anything above the carryover maximum is still forfeited, so a $1,500 balance with a $680 carryover loses $820.
Grace period
The alternative relief is up to two and a half extra months, commonly to 15 March, in which to incur new expenses against the prior year's balance.
It is more generous than carryover for a large balance, because the whole remaining amount stays available rather than just $680.
It is less flexible in timing, since the expenses must occur inside that short window rather than across a full year.
Try it in Walnut
Walnut connects to brokerage accounts and analyses investments. An FSA balance is a spending deadline rather than a portfolio decision, and the two rarely belong in the same conversation.
The claim deadline nobody reads
Plans set a run-out period for submitting claims, frequently 90 days after the plan year ends.
It applies to expenses already incurred during the year, so money can be forfeited on a perfectly valid expense purely because the receipt arrived late.
Submitting as you go, rather than saving a pile of receipts for a January session, removes this failure entirely.
A practical calendar
In October, check the balance and what remains to be spent. That is early enough to book dental or vision appointments.
In November, confirm which relief your plan offers, because the answer changes what December looks like.
In December, spend on qualified items you would have bought anyway. Buying something useless to avoid forfeiture converts a loss into a slightly smaller loss.
What actually gets forfeited
Balances left after both the spending deadline and any relief the plan offers, and valid expenses whose claims arrive after the run-out period.
The second is more common than the first, and it is entirely avoidable by submitting each claim when the expense happens.
Employers are not required to remind you. The plan portal shows the balance and the deadlines, and checking it twice a year is the whole discipline required.
Sources
The $680 carryover maximum for 2026 is from Rev. Proc. 2025-32, section 3.15. Health FSA rules including grace periods and carryover are covered in IRS Publication 969, and eligible expenses in Publication 502. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax advice.
FAQ
What is the use-it-or-lose-it rule?
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Money left in a health FSA at the end of the plan year is forfeited to the employer. The rule exists because the account is funded by salary reduction with the tax benefit taken up front, and the forfeiture is the trade for having the whole election available from day one.
What relief can a plan offer?
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Either a carryover of up to $680 into the next plan year for 2026, or a grace period of up to two and a half months in which to incur new expenses. A plan may offer one of the two, or neither, but not both.
What is the difference between carryover and a grace period?
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Carryover moves unused money forward and can be spent on expenses incurred any time in the next year. A grace period extends the window for incurring expenses, usually to 15 March, but only for the money left from the prior year.
Is there a deadline to submit claims?
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Yes, and it is separate from the spending deadline. Plans set a run-out period, often 90 days after year end, for submitting claims for expenses already incurred. Missing it forfeits the money even though the expense qualified.
What happens if I leave my job?
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Access generally ends on the termination date, and you can only claim for expenses incurred while covered. COBRA continuation of a health FSA is possible in some circumstances, which is worth asking about if a large balance remains.
Where does the forfeited money go?
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To the employer, which may use it to offset plan administration costs or reallocate it under the rules for experience gains. It does not return to individual employees as cash.
How do I avoid forfeiting anything?
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Check the balance in October rather than December, know which relief your plan offers, and spend on legitimate qualified expenses you would buy anyway: prescriptions, dental work, glasses, contact lenses and eligible over-the-counter items.